The DOE’s CSP Rules and You ……And Why Meralco Is Fighting it Tooth and Nail

MSK October 24 2015

The Department of Energy, the energy policy making body of the country, passed a Circular on June 30, 2015 requiring distribution utilities like Meralco to open to competitive selection process (CSP) their purchases of power supplies instead of just negotiating them with their sister company generators. It has been a serious conflict of interest.

Passing the Circular was a bold move of then Energy Secretary Carlos Jericho Petilla because it will most likely get the ire of three powerful groups, Meralco, the Lopez Group, and the Aboitiz Group who together control 75% of the power demand of the country.

It is called CSP to cover methods of competition to find least cost power from alternative but qualified sources and feasible technologies. It can include (1) competitive bidding, (2) competitive canvassing (known internationally as Request for Proposals or RFP’s), and (3) if those competitive sourcing fails, to negotiations. The power procurement activities from 1 to 3 is a process that hopefully will allow generators to compete for the requirements. Now Meralco just goes to No. 3 and bypassing 1 and 2. Generators cannot even sell to Meralco unless they agree to a 51% ownership of Meralco PowerGen.

Why should this concern you?

Because the price they negotiated among themselves are paid by you as the electric consumers and what do you expect from brotherly negotiations between the DU and its sister generators? Our organizations study of 2013 to 2015 Meralco rates showed higher charges by affiliated generators of P6.10 billion in 2013, P10.31 billion in 2014, and so far up to September 2015 it is P5.51 billion.

If we go all the way back from 2006 to 2010 when Meralco was still controlled by the owners of First Gas Power, the numbers were way worse. Metro Pacific took over control of Meralco from the Lopez Group in May of 2010.

Now Meralco is fighting tooth and nail to make voluntary or at least delay the implementation of the mandatory CSP. So much obfuscation and hoodwinking have been thrown at the public (and ERC) that you probably got confused and lost interest. Please don’t because it is your pocket that is on the line here (as the vested interests line theirs with free gold).

MSK would like to simplify the issues and their answers

<1. What is the bottomline of Meralco’s efforts to stop Mandatory CSP?

Put simply, Meralco and Metro Pacific would like to retain their royal right to negotiate among themselves the generation rates that they will charge to the Meralco consumers. They want to keep the 6,000mw Meralco generation market closed to only their affiliates and chosen few. They want to deny with chilling callousness the right of the Filipino consumers to competitively determined and market tested rates. They want to monopolize the Meralco generation supply for the next 25 years.

This is akin to having the privilege of dipping into the public’s pockets electric prices that only they among themselves determine, something even the government has no privilege to do in taxation without legislative approval participated in by Congressmen and Senators voted by the people to represent them and approved by the President of the Philippines.

2. Does an ERC regulatory review provide the public the equivalent competitive rates?

This is one of Meralco’s favorite arguments. It of course does not and let us explain.

A regulatory review is for the purpose of determining the fair and reasonableness of the contracted rate it is being asked to approve. While the ERC disallows, as part of its rigorous review, certain project costs and expenses and calculates what it would allow as a fair return on the generators investments for a definitive capacity or energy, what comes out is an evaluated rate that is fair and reasonable.

A competitive and least cost power rate on the other hand considers market dynamics, calculated optimized project costs, operating efficiency, incremental markets, economies of scale, and the investors calculation of a strategic return on investment it is willing to accept to compete with the others. The objective is to come up with a rate that is not fair and reasonable but one that will beat competition.

It is time tested that the existence of a working competition in a free market is a powerful price reducing force and must be allowed, assured, and mandated by the government to work for the benefit of the people. Why deny the electric consumers the benefit of this power competitive force?

CSP should be the main way to determine the contracted rate. An ERC Regulatory review is an added safeguard for the public in case there is a market and bidding aberration.

Metro Pacific as the new controlling group of the nation’s largest utility serving the critical hub of its industrial, commercial, educational, cultural, and government well-being must be satisfied with the profits guaranteed by its public service franchise as a distribution utility. We believe the distribution franchise granted by the people through the government did not come with a royal privilege to monopolize power generation and to further dip into the public’s pockets by self-negotiated prices.

The people and country need both competitively determined contracted rates and the safeguard of regulatory review. For purposes of assuring least cost power however, we have seen that competition beats regulation.

3. Is Mandatory CSP legal?

It is not only legal but a duty of the DOE, ERC, and Meralco.

The Epira Law of 2001 is profuse in its emphasis on the duty of these agencies to promote the public interest and for them to assure that consumers are provided “least cost power”.

Section 45 (b) of the Epira law granted the right of distribution utilities like Meralco to contract 50% of power supply to an affiliated company. It is silent however on how the contract will be awarded, did not require that it would be by negotiation, and neither did it ban the bidding of these contracts. In the light of this ambiguity, the law must be interpreted from the prism of public interest, which is mandated clearly as the duty of the DOE and ERC to promote and uphold. To paraphrase lawyers, “what the law did not prohibit is not prohibited”.

The DOE is within its mandate to put in policies to promote public interest and promote energy development. Opening the closed Meralco, Visayan, and Davao generation market and giving access to private investments will certainly encourage energy investments and introduction of new technologies. The ERC is within its right to mandate competitive bidding because it is not prohibited by the Epira law and it will be in keeping with its obligation to protect the interest of the public.

This is a defining moment for the new ERC under Chair Salazar. Will he for a change at ERC really stand up for the consuming public?

We are not asking the ERC to fully disregard the need of the generation company investors for fair return on their investments. Only that they should truly compete for the business because it is the public paying for it.

4. What is the risk to consumers of the delay in the implementation of the mandated CSP as Meralco is trying to do? Why are they working very hard to delay?

It can only mean they are trying to buy time to sign some mid-night power supply contracts with sister company Meralco PowerGen to probably the tune of 3,000 mw. If that happens the CSP rules would have been bypassed and the electric consumers are effectively denied competitive power for another 25 years.

If Meralco is sincere in their declaration that they only want to protect the interest of the public, we propose that they agree to a “standstill” provision by honoring June 30, 2015 as the applicability date of exempted power contracts. The DOE Circular 2015-06-008 provided that the mandated CSP is applicable to power supply contracts not yet filed or approved by the ERC on June 30, 2015.

We are sure whatever concerns they have on the CSP process including the choice of third party can be resolved within 60 days beyond October 27, not too long to have any adverse impact on any earnest Meralco power development plans.

5. What is the impact of making CSP voluntary as proposed by Meralco?

The current system is already voluntary. Meralco can open their power supply to competitive bidding if they want to. But they don’t prompting the need for a mandatory bidding. Since 2001, Meralco had always negotiated its main power supplies from its affiliated generators.

Making the CSP voluntary is like junking the DOE Circular.

6. Meralco asserts that mandatory CSP will not result to “least cost” power.

Leave it to Meralco’s spin doctors to try to redefine the meaning of “least cost” power.

We are aware that in competitive biddings the “lowest” bid price is not necessarily the winner because they have to comply with the credential, technical, and financial requirements of the bid. World Bank bidding rules defines the concept of “lowest responsive bid”.

A properly and honestly designed and administered bidding terms of reference can address all these concerns.

7. What is the appropriate role of a Third Party transaction adviser?

Meralco is trying to spook everybody on a Third Party because the bidding can be straight and incorruptible. In fact, that is the main need for a Third Party involvement I the CSP process. To assure transparency, objective bidding requirements and rules, evaluated power requirements, judicious evaluation and award. MSK calculates that the Third Party will cost only P0.01 to 0.02 per kwh compared to the benefit of lower generation prices by 0.38 to 1.05 per kwh.
The Third Party does not need to be a super body but a facilitator and transaction administrator to assure proper bidding. The ERC Grid Management Committee can be deputized to review proposed capacity additions for bidding. Its Distribution Management Committee can provide the same input for the CSP’s proposed by Electric Cooparatives.

8. The Benefit to the Consumers of Mandatory CSP goes beyond lower rates.

a) It not only will eliminate sweetheart rates but additional pass on charges to the public from sweetheart contract terms and administration of the supply contracts.

b) It will give the government through the DOE and ERC a sustainable degree of check and balance in determining the capacity and energy and service that will be contracted, and the opportunity for these government agencies to infuse a holistic strategy in energy mix, locational, environmental, and technological choices instead of just leaving them at the whim of the sister company generators.

c) By opening the generation market, it will further invigorate sustainable investments in power development and assure long term power supply for the country at competitive rates. It will encourage introduction of more efficient technologies and harness the entrepreneurial ingenuity of the private sector for the benefit of consumers.

d) It will control the simmering but may not be nationally known growing instability at the electric cooperatives as its elected board of directors discover their power to negotiate and as power generators jostle for a increasingly finite number of power supply contracts. It has resulted to bickering at the Board level and worse the signing of misguided contracts that are hurting their consumer members. A mandatory CSP will eliminate most of this and it will provide the government agencies including NEA a mechanism to assist these electric coops in power planning and energy mixing.

9. Meralco’s threat to take legal action against the CSP

Meralco’s controlling stockholders of course have the right to take that action as part of our functioning democracy. However, democracy works only if there is a responsible exercise of freedom.

A lawsuit by Meralco against a government policy that will clearly benefit the consumers would be unbecoming of a public service utility franchise holder and would only foster its image as a heartless utility who will fight tooth and nail to deny its consumers, and kapwa Pinoys, their right to competitive power. Consumers that they are supposed to serve.

In our mind such an action will forever smear the name of Metro Pacific, MVP, and Mr. Oscar Reyes as greedy and heartless businessmen. A “Meralco vs the Consumers” trial and hearings will only showcase undesirable impressions for them. We are not sure they want that image as they also mature and go into retirement.

Unfortunately in this battle for the CSP, while Meralco spends humongous budgets allowed by the ERC and paid for by its consumers on Spin Experts, media operators, lawyers, and sundry subalterns, the consumer and cause oriented groups (well, the true ones anyway), spend their own money as volunteers. There is something unfair in this picture but maybe that’s another issue for another time.

10. Moving Forward

We propose that as a way to move forward that the ERC pass the needed resolution to require the competitive selection process of at least 50% of the base-load requirements of the distribution utilities. Section 45 (b) of the Epira Law of 2001 allowed DU’s to contract with affiliated generators up to 50% of their power supply needs. This should be on all bilateral contracts not yet filed or approved by the ERC as of June 30, 2015.

Without exaggeration, the implementation of the CSP would be a test and defining moment of our government and country to do things right for the people. It will be a very sad national tragedy if the ERC succumbs to pressure and influence from the vested interests to once again jettison the interest of the consumers. With new commissioners at the ERC we had been hoping it would be a new dawn for enlightened regulation. We thank President Pnoy for at least balancing the composition of the ERC that now at least there is reason to hope.

The DOE had already mandated the competitive policy. Now it is up to the ERC.

PS

We reiterate our call for clarity on Section 9 “Repealing Clause” of the DOE Circular 2015-06-008 that contains very disturbing ambiguous language. The last time that kind of vague and innocuous language got inserted, the Epira Law provisions and intentions against monopoly and market domination were illegally perpetuated as Rule 11 of the Epira IRR. We reiterate our call for the repeal of this Rule. But maybe we will need to wait until after new Senators are elected.

Meanwhile, we are holding our breath on whose side the ERC will stand up for.

If you wish to understand more the issues on power, you can read more in our website matuwid.org.